Merck 2014 Annual Report Download - page 188

183CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
(7) MANAGEMENT JUDGMENTS AND
SOURCES OF ESTIMATION UNCERTAINTY
The preparation of the consolidated financial statements requires
management to make judgments and assumptions as well as esti-
mates to a certain extent. This affects the amount of assets and
liabilities, disclosures on contingent assets and liabilities, as well
as reported income and expenses. Actual values may differ from
the estimates made and assumptions and judgments may subse-
quently prove inaccurate. This is of fundamental importance for
the understanding of these consolidated financial statements and
the assessment of the underlying risks. The relevant assumptions
and estimates for the preparation of the consolidated financial
statements are reviewed on an ongoing basis. Changes in estimates
are considered in the period of the change and in subsequent
periods if the change relates to both the reporting period and also
future periods. Judgments, forward-looking assumptions and
sources of estimation uncertainty with the greatest potential
effects on these consolidated financial statements are presented
below.
Recognition and measurement of assets, liabilities and
contingent liabilities acquired in the context of business
combinations
The measurement of assets, liabilities and contingent liabilities at
fair value as part of purchase price allocations is subject to estimates
which are prepared using the services of external valuation
experts. The fair values of the assets and liabilities recognized as
part of the purchase price allocation of AZ Electronic Materials
S.A. and further information on this acquisition, which closed in
the reporting period, can be found in Note [4].
Sales deductions
The Group grants its customers various kinds of rebates and dis-
counts. In addition, expected product returns, state compulsory
charges and rebates from health plans and programs are also
deducted from sales.
The most significant portion of these deductions from sales is
attributable to the Biopharmaceuticals division. The most complex
and most substantial rebates in this division relate to government
rebate programs in North America such as the U.S. Federal Medi-
care Program and the U.S. Medicaid Drug Rebate Program. Other
significant sales deductions in the division result from compulsory
government rebate programs in certain European countries.
Insofar as sales deductions were not already made on payments
received, the Group determines the level of sales deductions on the
basis of current experience and recognizes them as a liability. The
sales deductions reduce gross sales revenues. Adjustments of
lia-
bilities can lead to increases or reductions of sales in later periods.
Impairment tests of goodwill and other intangible assets
with indefinite useful lives
The goodwill (carrying amount as of December 31, 2014: €5,693.9
million / 2013: €4,583.2 million) and other intangible assets with
indefinite useful lives (carrying amount as of December 31, 2014:
€168.7 million / 2013: €214.9 million) reported in the consolidated
financial statements are tested for impairment when a triggering
event arises or at least once a year. Impairment losses for goodwill
were not required to be recognized in the year under review. In
contrast, impairment losses of other intangible assets with indefinite
useful lives were recorded in the amount of €84.8million (2013:
€1.3million); these were mainly attributable to the termination of
development projects.
Goodwill and intangible assets with indefinite useful lives that
do not generate any independent cash flows are allocated to cash-
generating units within the scope of the impairment test. A cash-
generating unit is a division as presented in the Segment Reporting.
When testing for potential impairments, the Group determines
the recoverable amount by discounting expected cash flows and
therefore uses the value-in-use method. Reference is made to the
latest forecasts approved by the company management that cover
a period of five years. Cash flows for periods in excess of this are
included using an individualized long-term growth rate for the
specific cash-generating unit.
The impairment tests include assumptions and estimates of
the
amount of future cash flows and the discount rate. Among
other things, market observations, and – if available – market
data, target-actual deviations, detailed plans as well as past expe-
rience form the basis for the estimates of future cash flows.
Assumptions and estimates relate in particular to future customers,
saleable quantities, achievable prices, corresponding cost develop-
ments, the long-term growth rate and the weighted average cost
of capital (WACC) used for discounting. All of these assumptions
are considered a source of estimation uncertainty due to their
inherent uncertainty. The following long-term growth rates and
discount rates were used to conduct the goodwill impairment tests
of the cash-generating units: